Hewlett-Packard (NYSE:HWP), a leading global provider of computing and imaging solutions and services for business and home, is undergoing the biggest change in its company history The top HP management team, lead by newly appointed CEO Ms. Carleton Fiorina, former president of Lucent Technologies' Global Service Provider business, is facing tough challenges including revitalizing HP's image from business hardware manufacturer to Internet solutions and services provider. The team also needs plans to effectively compete with new and old rivals including Sun Microsystems (NASDAQ:SUNW), Dell Computer (NASDAQ:DELL), Lexmark (NYSE:LXK), EMC(NYSE:EMC) and Xerox (NYSE:XRX).

In the near-term, HP is facing strong criticisms from Wall Street's analysts who believe that fourth-quarter revenue forecasted by HP management may be too conservative and that the company used Taiwan's earthquake as a convenient scapegoat to explain away its  poorer-than-expected performance, according to Reuters.

Merrill Lynch & Co.'s influential analyst Mr. Steve Milunovich, said in Bloomberg that slower-than-expected Unix server sales in North America and rival Sun Microsystems Inc.'s dominance in selling servers to Internet service providers, are cutting into Hewlett-Packard's fiscal fourth-quarter revenue. There is no relief in sight as a recent price cut announcement by Sun Microsystems Inc. on its Ultra 5 Unix-based workstation to under $2,000, will put more pressure on HP's workstation bottom-line in the up-coming quarters.

In addition to pressure from Sun Microsystems, HP Netserver market share, which was derived from Intel-based NT server sales (NASDAQ:INTC), could soon be threatened by low-price servers from Dell and Compaq (NYSE:CPQ). With a well-managed build-to-order model and volume production, Dell could bring PowerEdge servers with Pentium III Xeon chips to the market at a price point that's radically different, said Mr. Kevin Soelberg, Dell's director of server marketing, in the Wall Street Journal.

In both the monochrome and color printing business sectors, the possibility exists that HP could lose more market share to competitors including Lexmark and Xerox.  Last month, Lexington, Kentucky-based Lexmark International rolled out six new monochrome printers and a high-yield printer cartridge which is capable of printing 25,000 sheets, the highest in the industry for standard printers.

According to Dataquest, HP's market share in monochrome printers has declined from 61 to 53 percent since 1995 while Lexmark has gained market share by almost 60 percent.  HP's introduction of low-priced Apollo P-1250 model printers to stop Lexmark from dominating the sub-$100 printer market seems to be ineffective. As reported in Bloomberg, Merrill Lynch analyst Mr. Steven Milunovich told Barron's that sales of Lexmark Z models, which start at $49 after rebates, appears to have surpassed Hewlett-Packard Co.'s low-priced Apollo printers.

From our viewpoint, HP's decision to stop reselling EMC storage products in favor of Japan's Hitachi Data Systems, could have an impact on HP long-term growth in the enterprise storage business. Although Hitachi's system was less expensive at the time, the recent rise in the Japanese Yen could drive the price of Hitachi systems higher, with EMC's storage products becoming more attractive to customers in both technology and price point.  As reported in Bloomberg, HP experienced unspecified declines in its storage machine sales in the fiscal third quarter and attributed the slump, which it said it had expected, to the decision to stop selling EMC's machines.

Fundamentals: Our data suggests that investor sentiment for HP's stock has significantly declined to the all-time low this year of 0.8.  As of October 1, HP stock is traded at a P/E multiple of 25, based upon 12-month trailing earnings. The "growth" P/E multiple, which represents a ratio between stock price appreciation and earnings growth in the past 12-months, has declined from the recent high of 8.1 to 3.54. For comparison, the "growth" P/E multiple for Sun Microsystems' stock is 14.2 or four times higher than that for HP stock. 

Although HP stock is relatively inexpensive compared to those of other high technology companies, we believe that investor's concerns regarding issues including servers, workstations, printers and their enterprise storage business, could keep investor sentiment at a low level. We believe that HP stock could rebound back to its new high after the above concerning issues have been addressed by HP management.